The case centred around the proper construction of Extra-statutory Concession B18 (ESC B18) issued by HMRC to address an anomaly in the relevant legislation (originally sections 686, 687, and 809 of the Income and Corporation Taxes Act 1988; now sections 493–498 of the Income Tax Act 2007), whereby there can be double taxation where a non-resident trust makes distributions to UK resident beneficiaries.
More specifically, these concessions can and were broken down into three parts by the Court of Appeal (CoA) as follows:
- The first concession serves to enlarge the ability of a beneficiary of a UK resident trust to claim to “look through” the trust (Concession 1);
- The second concession applies where a non-resident beneficiary receives a payment out of income of the trustees in respect of which, had it been received directly, it would have been chargeable to UK tax (Concession 2); and
- The third concession allows a UK beneficiary of a non-resident trust to claim appropriate credit for tax actually paid by the trustees on the income out of which the payment to the beneficiary is made (Concession 3).
Background of the case
In Murphy, the issues arose when a non-resident trust made distributions of £9,162,320.28 to UK-resident beneficiaries.
The trustees and beneficiaries sought HMRC’s agreement that the beneficiaries would be granted credit, under Concession 3, for UK income tax which had been paid on trust income, regardless of whether the income of the trust had arisen within the six years prior to the year of assessment in which the payment to the beneficiary was made or a longer period on the basis that Concession 3 permits a UK-resident beneficiary to claim credit for tax actually paid by the trustees on income which is used to make payment to the beneficiaries.
Whilst the two other concessions specifically mention a six-year time limit, Concession 3 does not explicitly mention a six-year time limit. Nonetheless, HMRC permitted the claim for six years only and refused the remainder of the claim as it related to earlier periods. HMRC argued that the six-year time limit in the first two concessions should be read across into the third concession and that earlier versions of the third concession should be considered in any event. They also maintained that an "ordinary sophisticated taxpayer" would not take EU Law into account when considering the meaning of ESC B18.
Brief synopsis
The beneficiaries brought Judicial Review proceedings, but the High Court agreed with HMRC's interpretation of the concession and found in their favour, dismissing the claim. However, on appeal, the CoA ([2023] EWCA Civ 497) overturned that finding on the basis that the UK-resident beneficiaries had a legitimate expectation that they could rely on the wording of the latest version of ESC B18 because "read naturally, the text…strongly supports the appellants' case".
Relevant considerations
How should an ESC be construed?
As the name suggests, ESCs are not statute and should not be construed as such (see R (Greenwich Property Ltd) v C&E Commrs [2001] EWHC Admin 230). Therefore, wider considerations, other than the usual rules (literal, golden, and mischief) and the purposive approach, may come into play.
Circumstances in which a taxpayer may take advantage of an extra-statutory concession
A good starting point is to consider when a taxpayer may rely on an ESC. As Sales J explained in Accenture ([2009] EWHC 857 (Admin)), a claim by a taxpayer to take advantage of an extra-statutory concession is “in the nature of a claim to benefit from an enforceable substantive legitimate expectation”.
Legitimate expectation and which interpretation would occur to the 'ordinarily sophisticated taxpayer'
The underlying principle for considering whether a taxpayer has a legitimate expectation that they may rely on HMRC concessions or guidance is whether or not the 'hypothetical representative' being an "ordinarily sophisticated taxpayer' irrespective of whether he is in receipt of professional advice" would so rely per R (Davies) -v- HMRC [2011] UKSC.
Is Concession 3 clear, unambiguous and devoid of relevant qualification?
For HMRC to be bound by a statement it should be “clear, unambiguous and devoid of relevant qualification”.
In Davies (referred to above), Lord Wilson said in paragraph 29 that the right course was to:
“proceed on the basis that the representations in the booklet for which the appellants contend must have been clear; that the judgment about their clarity must be made in the light of an appraisal of all relevant statements in the booklet when they are read as a whole; and that, in that the clarity of a representation depends in part upon the identity of the person to whom it is made, the hypothetical representee is the 'ordinarily sophisticated taxpayer' irrespective of whether he is in receipt of professional advice”.
With that in mind, the CoA in Murphy stated as follows "I respectfully differ from the Judge [from the lower court]. In my view, it is clear from ESC B18 (1999) that Concession 3 is not subject to a six-year income limit, and there is in this respect no ambiguity or relevant qualification. It follows that the appeal should, as it seems to me, be allowed".
To exemplify that reading, see paragraph 4 of the Judgment which concludes, inter alia, that "while the conditions listed in respect of Concession 3 largely replicate those given for Concession 1, the draftsman has not thought it appropriate to repeat the requirement for a payment to be “out of income which arose to the trustees not earlier than six years before the end of the year of assessment in which the payment was made”. The obvious inference is that Concession 3 was not intended to be subject to that limitation".
"It remains, however, highly significant that Concession 3 specifically invokes section 687, which differs from section 809 in its omission of the six-year income limit. The link with section 687 is reinforced by the reference to it in the final paragraph of ESC B18 (1999)."
Consistency with EU Law principles
On the basis that "EU law guarantees freedoms of goods, persons, services and capital. A measure may potentially be held to infringe such a freedom on the basis that it discriminates directly or indirectly by reference to nationality or is capable of hindering or rendering less attractive exercise of the freedom" the CoA considered that EU law is of significance and that "[t]he hypothetical “ordinarily sophisticated taxpayer” can"…"be expected to appreciate that, read in the way favoured by HMRC, ESC B18 (1999) could favour UK trusts over non-resident ones and so, potentially, run counter to EU law principles" concluding that that "would tend to confirm to an “ordinarily sophisticated taxpayer” that, contrary to HMRC's case, Concession 3 is not subject to a six-year income limit."
Should previous iterations of the ESC B18 be considered relevant to the interpretation of the current version?
Rather than consider previous versions of ESC B18 as relevant to the latest version's interpretation, the CoA considered that this should only serve to illustrate the point that the changes were made in order to make clearer the intention of ESC B18 (see para 51 of the Judgment). Further, the CoA found that "[a]n “ordinarily sophisticated taxpayer” would not expect to have to research earlier versions of ESC B18 in order to understand" the latest version of an ESC especially when the earlier versions were not readily available to the taxpayer.
Should HMRC's unpublished practice be given weight?
Agreeing with the judgment of the High Court, the CoA also considered that no weight should be given to material of which the 'ordinary sophisticated taxpayer' could not have been expected to be aware, including an apparently longstanding HMRC practice in respect of ESC B18 particularly in circumstances where HMRC's dealings with taxpayers are private. However, where there are means to find out HMRC's practice, taxpayers should proceed with caution because:
"…there may be cases in which the “ordinarily sophisticated taxpayer” would have been alerted to a settled practice of HMRC through, say, HMRC manuals, guidance published by HMRC or commentaries in practitioner texts. In such a situation, HMRC practice may be of relevance"…"As, however, Sales J explained in Accenture, a claim by a taxpayer to take advantage of an extra-statutory concession is “in the nature of a claim to benefit from an enforceable substantive legitimate expectation”. Materials revealing a settled practice on the part of HMRC may bear on whether a taxpayer had such an expectation."
Conclusion
The CoA Judgment marks a victory in an area which is often seen as an uphill battle for taxpayers; getting HMRC to stick to their word (written or otherwise). The Judgment also provides helpful guidance when considering the relevant considerations when interpreting HMRC guidance, manuals and other extra-statutory concessions.
The upshot of the Judgment so far as the 'black letter law' is concerned, is that it also confirms that there is effectively no time limit on claims for income tax credit made by UK-resident beneficiaries of non-resident trusts where the trustees have accounted for the income tax. Taxpayers in this position should consult with their professional advisors in respect of whether historic claims can be submitted.
Mishcon's Tax Disputes & Investigations Team have considerable experience in the area of judicial review. Please do not hesitate to contact the team should you require assistance with matters concerning HMRC’s decision making.